Decision Memo to State Leaders: How to (or Not to) Compete in the Global Economy

In a recent blog, I offered a simple line of reasoning: if you are a state or nation that wants to be competitive in the global economy, and the skills you can offer on the global labor market are low but the price of your labor is high relative to other countries, you can compete, but you will have to lower the price of your labor until it matches the wages charged by lower-wage competitors offering the same skills. You can be competitive that way, but your people will get poorer and poorer.

Alternatively, if you want your people to have a high standard of living, you can compete on the quality of your labor, but, if you want to do that, you will have to have an education and job training system that produces a workforce that is among the best educated and best trained in the world, because employers looking for very highly-educated staff can now look all over the world for them, just as they do for the lowest-priced, low-skill labor they can find.

I have yet to meet a governor or state legislator that mounts a podium to announce a policy designed to produce full employment by impoverishing his or her constituents, though, in truth, some are doing exactly that. The question, of course, is what policies should be pursued by state legislators and governors who want their states to compete on terms that will produce broadly shared prosperity for their constituents. If you accept the line of reasoning I just summarized, the only possible answer is by implementing policies that would enable the state to be home to one of the best-educated and trained workforces in the world.

You might object at this point that I am talking about industrial policy, in the sense of the state interfering in some way with normal market forces in a free market economy. But a state that forgives some companies but not others all or part of their taxes to come to that state or stay in it is also interfering with the normal workings of the market. The states that offer free vocational training, free highways or free utilities to some firms but not others are most certainly intervening in the market. When states offer enormous subsidies to firms that move in to take advantage of low-wage workers, using funds that they might otherwise have used to greatly improve the skills of their workers, they are choosing an industrial policy that favors firms whose business plans require low-wage workers and are creating a hostile climate for firms whose business plans are based on high-skill workers. They have chosen an industrial policy guaranteed to keep the people of that state poor. Policies of exactly this sort are routinely pursued by many American states. Some of these states did this during the Great Recession when any kind of job creation looked good, but are now wondering whether they should change course.

Of course, it is not simply a choice between a high-skill, high-pay economy and a low-skill, low-pay economy. Some firms and whole industries are most efficient when they employ a few highly skilled, highly paid people at the top and a lot of other frontline workers who don’t need high skills and don’t make much money. But others are most competitive when everyone from the frontline workers to the people in the corner offices are well educated and highly trained. An economy based on the first kind of firm will produce steadily increasing income inequality. But an economy based on the second will produce broadly shared prosperity. Obviously, all states and countries have some firms employing mainly low-skill labor. There will always be such firms. The issue is what predominates in the economy as a whole.

I have just described three kinds of firms that differ from each other on competitive strategy. As we have seen, each kind of firm can end up dominating the whole economy of a state, depending on that state’s industrial strategy. So the decision on industrial strategy will end up determining both the average economic performance of the state—whether it is getting richer or poorer overall—and also the distribution of income within the state.

Now note that the choice of industrial strategy has consequences for education policy. A state that is competing on the price of labor, the cost of living and the size of the amenity package it can offer the firms it is trying to attract is not likely to invest much in its education system, much less in the things that highly educated people are looking for when they decide where they want to work. Indeed, if such a state pursues that low-wage, low-cost competitive strategy long enough, it won’t collect enough taxes to invest much in education, whether it wants to or not. It is then condemned to compete on wages and to make its citizens poorer over time.

Conversely, a state that wants to pursue a goal of broadly shared prosperity has no choice but to invest in a very high-quality education and training system for all of its people.

And a state which, by design or accident, has ended up pursuing an industrial strategy that favors firms with staffing profiles that usually have few highly educated and trained professionals and managers and a much larger number of poorly educated workers in production and services—or a state with a few islands of high-tech, high-pay, high-skill firms surrounded by seas of low-skill, low-pay industries—such a state will usually field a few very expensive suburbs with superb schools and a much larger number of districts with much more meager resources and much lower student performance.

Which is to say that, by and large, states’ education systems typically have profiles that match their industrial policies (even when they say they do not have an industrial policy). Put another way, states that decide they want to provide broadly shared prosperity to their citizens find out that they have to change both their industrial policies and their education systems and they have to do that in a deliberate, coordinated way. Three examples of what I have in mind will suffice: Singapore, Switzerland and Massachusetts.

When Singapore became an independent country in 1960, most of its population was illiterate. Only a handful had a college education. It had no natural resources, not even enough land to feed itself. Its economy was in bad shape even by developing countries’ standards. Today, Singapore is one of the richest countries in the world, one of the globe’s major hubs for telecommunications, oil service, shipping, finance and high-tech manufacturing.

Singapore began its journey by attracting manufacturing companies that were looking for low-skill labor, because that is all it had. In fact, it had to work at a feverish pace to provide enough workers with just plain basic literacy to attract these firms. And it offered low-cost infrastructure and tax concessions to get them. It was running a low-skill, low-wage economy, which was a whole lot better than no economy at all.

But then, it went after high-tech manufacturing companies building high-value-added products. To get them, it needed much better educated and much better trained workers. It figured out how to redesign and rebuild its entire education system to produce exactly that. It redesigned the schools to raise the performance of Singapore’s students to world-class levels. It built universities that rank among the best anywhere and vocational schools and polytechnics designed to give Singapore a workforce with outstanding technical skills at every level. At the same time, it created policies designed to attract high-value-added manufacturers and terminated policies that had been explicitly designed to make Singapore attractive to companies whose business plans required them to employ people making low wages.

But this was not enough. After Singapore succeeded in making itself a world destination for high-tech manufacturing, it decided to do the same thing in services like finance and to move from attracting global firms headquartered in other countries to growing its own global firms. It knew it would have to move from an education system producing people who were very skilled at executing someone else’s ideas to a system producing creative people who could come up with their own ideas. And so it set out once again, building on what it had already achieved, to fundamentally change the goals and therefore the design of the education and training system to achieve their new goals. It was all done step by step, very consciously, with careful attention to design and execution, to build one of the most successful economies in the history of the world.

A few years ago, my colleagues and I were interviewing some of the top corporate executives of a group of world-famous companies headquartered in Switzerland. We asked them to account for that country’s success in building an education system whose high school graduates are among the highest scoring in the world, whose vocational school graduates are among the most skilled in the world, and whose universities are frequently referred to by people outside Switzerland as the Harvard and MIT of Europe. Their answer was unanimous. A couple of decades earlier, they said, executives of these same companies had gathered together to see if they could agree on a vision for their country. They wanted, they said, a country that could deliver broadly shared prosperity to their people. They knew that could only happen if Swiss firms were among the global leaders in their respective industries. And that could only happen if they had one of the world’s best-educated and most highly skilled workforces. The group of firms devoted themselves to these goals since then, including and especially the goal of creating one of the best-educated and most highly skilled workforces in the world. This consensus on goals is, we were told, in the DNA of the Swiss business culture and its political culture.

Massachusetts is yet another case of a state whose embrace of the goal of a skills-driven high-value-added economy has long been in the local DNA. The state, of course, was the birthplace of public schooling in America. It is home to a large number of the most renowned public school systems and private, independent schools in the world. And its concentration of world-class liberal arts and technical colleges and universities is legendary. It is, of course, one of the richest states in the United States, as economically successful as all but a tiny number of countries.

Massachusetts’ success, in modern times, is a product of the state’s leadership in the Second World War in the wartime research effort. After the war, the government built an interstate highway around Boston, Route 128. Cabot, Cabot and Forbes, a leading developer bought land up to build infrastructure all along this highway designed to house the high-tech companies being formed by the scientists and technologists returning to their universities, hothouses for a steady and growing stream of advanced products and services that changed the face of the country, making their founders and their colleagues rich beyond their wildest dreams. This tight knit collaboration between government, private developers, scientist-entrepreneurs, sophisticated investors and world-class educational institutions from schools to research universities set the pattern for Silicon Valley, the Austin miracle, the Research Triangle in North Carolina and many other similar seed beds of sustained economic growth based on high skills and the high value that well-educated and trained people can add to the products they make and the services they provide.

Neither Switzerland nor Massachusetts are rags to riches stories like Singapore. Both are stories about high-skill, high-value-added economies that knew exactly what had made them and their citizenry rich and had built on their earlier successes to set even higher sights than they had earlier. Both had adjusted and refocused the designs of their education and training systems to adapt to the changes taking place in the dynamics of the global economy, just as Singapore had done at many points along the way. If you look closely, you will see that the Massachusetts’ education reform strategy employs strategies strikingly similar to those pursued earlier by Singapore and Switzerland.

So, governors, the choice is yours. Either set a goal of broadly shared prosperity based on high skills for your whole workforce and sell it to your constituents, or watch your state slide slowly—or perhaps not so slowly—into relative poverty and the civil strife that will inevitably accompany it. It is up to you.